ARMCHAIR INVESTOR (sm) MORNING MARKET NEWSLETTER A TREND-FOLLOWING STRATEGY. CURRENT MARKET DIRECTION: DOWNTREND ( Correction ) in Attempted Rally

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1 10/18/2018 DOWNTREND day #5 Market indexes fall hard support at 200 m.a.? Thursday Volume 17 #202 ARMCHAIR INVESTOR (sm) MORNING MARKET NEWSLETTER A TREND-FOLLOWING STRATEGY To open the FULL ARMCHAIR INVESTOR NEWSLETTER, click here Then click on CURRENT NEWSLETTER. CURRENT MARKET DIRECTION: DOWNTREND ( Correction ) in Attempted Rally THURSDAY: Both major indexes fell hard Thursday but did not undercut the prior low. The market direction remains as Downtrend with Attempted Rally. The S&P500 held at its 200-day m.a.; the Nasdaq dropped slightly below its 200-day m.a. I characterize both indexes as At their 200-day m.a.s. DAILY MARKET ACTION. 10/18/18 Index Close Index % Change Volume % Change Volume vs 50- day Avg. Accumulation or Distribution Day? Nasdaq 7, % +7.3% +5.8% Major Distribution S&P500 2, % NYSE Volume Major Distribution NYSE 12, % +8.8% +0.0% Major Distribution DJIA 25, % Major Distribution INTERPRETATION: 1. DOWNTREND: The market has been under significant selling. Consider exiting out of any stocks that show weakness (or put a stop under the current price in case the stock suddenly sells off). I will short the index ETFs if they close below their 200-day moving averages with higher volume. Until then, I see a strong signal that says they will make continue to fall. 2. ATTEMPTED RALLY: The market has recently risen and held above a recent low. WHAT HAS TO HAPPEN NEXT TO PUT THE MARKET INTO A NEW UPTREND? 3. A FOLLOW-THROUGH DAY a day when one of the two major indexes has a strong accumulation day rising at least 1.3% with higher volume than the day before (but not necessarily above average) with confirming market action.

2 There are more confirming details about the shift back into Uptrend, but most importantly, look for that Follow-Through day. A CHANGE TO MY CURRENT TRADING RULES: I am concerned about the market action this year which included three hard market drops to its 200-day moving average - taking back almost off the year s gains. One thing I know about market direction is that Downtrends usually happen faster than Uptrends. That makes them harder to catch. William O Neil taught me: If you get three losses in a row, stop trading and figure out what s wrong. 1. Are my trading rules correct? 2. Are my trading rules complete? 3. Am I following my trading rules? If the answer is yes to all three but you are still losing money, then this may just be an untradeable market. I have made money on the Uptrends this year, but the fast Downtrends (corrections) took most of it back. (SEE note on this year s three market corrections below) Thus, I am reverting back to a more conservative market strategy: Hold the QQQ in confirmed Uptrends only, taking cash position in Downtrends. And Yes, there will be a major correction somewhere in the future which I will eventually short late. But I will sleep well at night! Biggest Nasdaq drops in 2018: From 1/26/2018 to 2/8/2018, the Nasdaq lost 9.7% in just 11 trading days, taking back 3 months of gains. From 3/12/18 to 4/2/18, the Nasdaq lost 9.5% in just 15 days, taking back most of the gains of the rebound from the 2/8 low. The current drop began in earnest on 10/1/18, losing 8.8% in 10 days, taking back 21 weeks of gains. Reminder: The market continues in the direction it is going (down) until it doesn t. ========================================= HOW YOU DO TO PROTECT YOUR PORTFOLIO NOW? ARE YOU LUCKY ENOUGH TO HOLD A FEW WINNING STOCKS? HOW DO YOU KEEP THOSE GAINS? 1. Sell your stocks as they show weakness. See Chapter 11 in William O Neil s classic investing book, How to Make Money in Stocks. 2. Watch any stock you still hold daily. There are a few stocks that continue to rise or hold prior gains

3 I have two workshops that you should consider right now: SELLING (TO KEEP YOUR GAINS) Workshop SHORTING (TO MAKE MONEY ON THE WAY DOWN) Workshop Both of these workshops will be offered over the next two weeks in hotels in the DFW area. 80 page, full-color reference notebook included for each. NOTE: IF YOU DO NOT LIVE IN THE DFW AREA, these workshops are offered online with the workshop manual sent to you in PDF form. MORE ON MARKET DIRECTION: The MARKET FACTORS, COUNTS & RATINGS table shows how deep the losses are. Almost every factor I follow in this table is RED failing deeply. View the MARKET FACTORS table in the FULL newsletter (link at top of this newsletter) The Accumulation/ Distribution ratings remained neutral: The Nasdaq stayed at D+ The S&P500 rose to C- The DJIA rose to C+ The Acc/Dist ratings range from a high of A+ to a low of E. Just think of a grade in school: A+ is the strongest accumulation (buying by institutional investors) and E shows heavy distribution (selling). THIS IS A GOOD TIME TO BUILD A WATCH LIST. How long will this Downtrend run? Most down market drop faster than they rose (although today s drop in the Nasdaq of 4.1% was a whopper!!!) Consider adding the best stocks (holding up better than most) to your watch list. When the market returns to a healthy UPTREND, you can attack (implement) that watch list with vigor!

4 TREND-FOLLOWING STRATEGY Are You a Trend Trader? Here is the current action: Downtrends are harder in gain profits in. We ve gotten whipsawed since the recent Downtrend call Today's Armchair Investor Trend-Following Returns for Current Downtrend begun on 10/10/2018 This table tracks shorting the QQQ and investing in the Inverse ETFs which are designed to move opposite to the market by the multiple indicated (1x, 2x, and 3x) 10/17/18 WAIT IN CASH FOR YOUR TREND-FOLLOWING POSITION! NEXT review your individual stock. Hold onto stocks that are holding onto their recent gains. Price at Open 10/11/2018 the Day after the Trend Changed Closing Price Today ETF % Change Today * PROFIT / LOSS from 10/10/18 Signal: Market in DOWNtrend Short QQQ % -1.2% PSQ (1x) % -1.5% QID (2x) % -3.2% SQQQ (3x) % -5.3% Note: Downtrends usually falls faster than Uptrends and do not last as long. The PSQ ETF is designed to move opposite to the QQQ (the PSQ rises when the QQQ falls.) The QLD is designed to double the price move of the PSQ. Visit Proshares.com for more information. The SQQQ is designed to triple the opposite price move of the QQQ. Visit Proshares.com for more information on inverse ETFs. The "Profit" calculation is based on buying the ETF at the opening price the morning after the signal. In a downtrend, the inverse ETFs (PSQ and QID) should go opposite to the Nasdaq. For the QQQ, the calculation is reversed, e.g. when the QQQ falls, the PROFIT column rises to indicate I have shorted the QQQ and vice versa. TREND ETFs 10/11/18 FINAL ARMCHAIR INVESTOR TREND-FOLLOWING RETURNS FOR LAST UPTREND Opening Price on 4/11/2018 Opening Price on 10/11/2018 Final Gain Since 4/10/2018 Uptrend Signal QQQ (1x) % QLD (2x) % TQQQ (3x) % The ETF QQQ is designed to move WITH the largest 100 stocks on the Nasdaq. QLD is designed to double the price move of the QQ. The TQQQ is a more volatile Visit Proshares.com for more information.

5 THE ARMCHAIR INVESTOR TREND-FOLLOWING strategy is SIMPLE and FAST to execute: Be in the market when it is going up. Be out or (or short) the market when it is going down. NOTE: In the current market, I am in cash, no yet short Protect yourself with an 8% stop. You could have earned the above ARMCHAIR INVESTOR TREND- FOLLOWING RETURNS in less than 5 minutes a day. Follow these Armchair Investor Trend-following Strategy moves: When the Market direction moves into UPTREND: Buy an UPTREND ETF (and sell any DOWNTREND ETF you own) When the Market direction moves into DOWNTREND: Buy a DOWNTREND ETF or wait in CASH IF YOU PREFER (and sell any UPTREND ETF you own) Repeat!! Remember: It is hard for the big money (funds, banks and money managers) to hide their actions. But if you follow this newsletter, you will also learn to interpret their stealth moves and take advantage of that knowledge. DO YOU INVEST IN INDIVIDUAL STOCKS? Always consider taking some profit if significant distribution is showing up for your individual stocks. However, many individual stocks are rising with gusto! Look at all the lists in the Investor s Business Daily newspaper for stocks breaking out with high volume. They are there! To get a deeper sense of the health of the market, look at the MARKET FACTORS, COUNTS & RATINGS table included each day in the FULL Armchair Investor newsletter. It looks at 7 key market direction factors and highlights the leaning of each: If the factor leans toward the Uptrend, that box will be green If the factor leans toward the Downtrend, that box will be orange or red

6 Questions? Contact Charlotte at YOU ARE INVITED TO BE MY GUEST AT AN ARMCHAIR INVESTOR WEEKLY CLASS. We have 4 classes given each week in Dallas, Addison and ONLINE: Monday night 7 9 p.m. Tuesday afternoon 3:30 5:30 p.m. Wednesday morning 10:00 a.m. to noon Sunday afternoon 3 5 p.m. ONLINE PLEASE REGISTER for your visit at Armchair Investor classes OR CALL Seating is limited to no more than 3 guests at each session to ensure the paid subscribers receive full value. Monday and Tuesday classes are given at the Barnes and Noble bookstore 5959 Royal Lane (at Preston) at in the café. Wednesday classes are given at the Barnes and Noble bookstore 5301 Beltline Rd, Addison in the café. No advice is ever given in this newsletter. It is provided for your education and entertainment only. Armchair Investor (SM) 2018, Charlotte Hudgin All rights Reserved MARKET ACTION 2018 YEAR-TO-DATE. 10/18/ Closing Price Current Price Index % Change Year-to-Date Nasdaq % S&P % NYSE 12, , % DJIA 24, , % The MARKET ACTION 2018 yearly table is included for your reference. These returns have little relevance to trend-following returns since trend-followers do not hold during Downtrends and may lighten their holdings during Uptrends under Pressure.

7 HOW CLOSE ARE THE INDEXES TO ALL-TIME HIGHS*?. 10/18/2018 Nasdaq S&P500 NYSE DJIA Date of Index Alltime High* All-time High (as of last Friday) 8/30/2018 9/21/2018 1/26/ /3/ Current Price Below (-) or Above (+) Recent High (%) -8.0% -5.9% -8.7% -5.4% Below (-) or Above (+) Recent High (#) *New Highs are updated each Friday. If an index makes a new high during the week, its price will be highlighted in light green and you will see how it grows past that prior high during the week. 10/12/2018 Weekly Index % Change LAST WEEK S MARKET ACTION. Weekly Volume % Change Volume Above/ Below 10-week Avg Type of Week Nasdaq -3.7% -0.7% +22.0% Major Distribution** S&P % NYSE -4.3% S&P 500 Volume +17.2% +27.0% Major Distribution Major Distribution DJIA -4.2% Major Distribution ** The Nasdaq s volume was lighter last week than the prior week. But the volume was still a very hefty 22% above average. Thus, with the 3.7% drop in the index, the week was a week of heavy selling a DISTRIBUTION week.

8 MARKET FACTORS, COUNTS & RATINGS 10/18/2018 Type of DAY for Nasdaq Accumulation, Distribution or Neither Major Distribution Market Direction Uptrend, Under Pressure, Downtrend, or Attempted Uptrend Downtrend All Nasdaq Accumulation & Distribution Days Accumulation Days Distribution Days Nasdaq 20-day count 3 7 I follow the Nasdaq more closely because it usually leads the change in trends. If the S&P500 is showing market reversal leadership (more distribution), it will be included here. Count of Up Days and Down Days Up Days Down Days Nasdaq last 10-days price movement only 2 6 Days that do not move at least + or - 0.2% are not included in the Up/Down count which does not always, therefore, add up to 10 days. Leaders Up/Down with High Volume Nasdaq 10-day ratio This indicator looks at leading stocks (high RS) and is, thus, biased to the upside. Uptrend indicator: 1.5 or higher. Neutral: 1.0 to Downtrend: less than 1.0 Market Accumulation/Distribution Ratings Nasdaq D+ "A": heavy accumulation, "B": moderate accumulation, "C": neutral, "D": moderate distribution, "E": heavy distribution. S&P 500 C- Accumulation = Institutions are BUYING, Distribution = Inst are SELLING DJIA B- 0.8 Are Major Indexes Above or Below Moving Averages? 50-Day 200-Day Nasdaq Below At "At" is within 1% above or below the moving average. S&P 500 Below At "At" is within 1% above or below the moving average. NYSE Below Below DJIA Below At

9 Nasdaq Daily chart, 4 months Nasdaq continues in DOWNTREND. Index holds above 50-day m.a.line Last New Downtrend Began 10/10/18 - Nasdaq Weekly chart, 1 year (updated each Friday) Note how fast the market dropped this year Just look for the big red bars +85% over 3 Years These charts are from StockCharts.com, a valuable site for investors with many free tools.

10 S&P500 Daily chart, 4 months The S&P500 in DOWNTREND Index above 200-day m.a. Last New Downtrend Began 10/10/18 S&P500 Weekly chart, 1 year (Updated every Friday) S&P500 crashes through up-channel, find support at 200-day m.a. These charts are from StockCharts.com, a valuable site for investors with many free tools

11 MARKET ACTION (Nasdaq) OVER THE LAST 20 DAYS (For a full explanation of the terms in this table see end of this newsletter) # Date Close Index % Change Volume % Change Current Trend Day Count Type of Day: Accumulation, Distribution or Neither ( ) CONSISTENT WITH: UPTREND or Downtrend? THE COLOR OF THE CURRENT TREND DAY COUNT tells you the current market direction: Red = Downtrend, Yellow = Uptrend under Pressure, Green = Uptrend 20 9/21/ % +55.6% 116 Minor distribution DOWNTREND 19 9/24/ % -37.5% /25/ % -5.4% /26/ % +0.7% 119 Minor distribution DOWNTREND 16 9/27/ % -11.0% 120 DOWNTREND 15 9/28/ % +11.2% /1/ % -1.5% /2/ % +5.3% 123 Minor distribution DOWNTREND 12 10/3/ % +26.6% 124 Minor accumulation day UPTREND 11 10/4/ % +8.0% 125 Major Distribution day DOWNTREND 10 10/5/ % -18.0%** 126 Major Distribution day DOWNTREND 9 10/8/ % -17.1% 127 UPTREND 8 10/9/ % +25.4% /10/ % +17.4% 1 Major Distribution day DOWNTREND 6 10/11/ % +5.1% 2 Major Distribution day DOWNTREND 5 10/12/ % -11.4%** /15/ % -18.8% 4 UPTREND 3 10/16/ % +20.8% 5 Major Accumulation day Day 3 of Attempted Rally UPTREND 2 10/17/ % -9.2% /18/ % +7.3% 7 Major Distribution day DOWNTREND Note: Although the volume on 10/5/2018 was lower than the day before but strong, above-average volume. Thus, in this market with the significant price drop, I have labeled 10/5 as a Major Distribution day. The CURRENT TREND column colors: Green: Uptrend. Yellow : Uptrend under Pressure. Red: Downtrend. A Stalling Distribution day a day near the top of a rise, on significantly higher volume than the day before when price starts the day off with a rise then give most or all the rise back. Distribution days drop off the 20-day count for 2 reasons. The Index or stock: (1) TIMES OUT: the distribution day is 21 days old or older or (2) CLIMBS OUT: The index rises 5% or more above the close of the distribution day

12 FOR INVESTORS IN INDIVIDUAL STOCKS More detailed comments on market direction and technical analysis for individual stocks MARKET IN DOWNTREND THE STRENTH OF THIS UPTREND CAN BE SEEN IN THE PERFORMANCE OF ITS BEST STOCKS. A Downtrend is a time of great caution! A careful review of your stocks will probably cause you to sell at least half of them. o If you have stocks that are holding up, the hold them. o Be sure your STOPS ARE IN. If you have stock showing signs of weakness, consider: Reducing or exiting those positions, Putting in STOP orders to exit if the stock continues to fall. Re-read How to Make Money in Stocks book (either edition: by William O Neil or Matt Galgani). Both have a chapter on identifying stocks that should be sold. It is time to review those pages. IF you see stocks you like, add the stock to your watch list. NOTE: >>>>There are IBD Meetups around the world available to you each month! WHY DIDN T YOU GET YOUR STOP PRICE? If you tried to sell TLRY yesterday, you might have thought that a stop order should have gotten you out at a better price then you received. This might be why you didn t: A Stop Limit order won t be executed if the price drops below its limit price by the time your order gets to the front of the line. Orders are executed by the exchange by the time they were entered. I NEVER USE A STOP LIMIT for this reason. A STOP LOSS order will be placed in line as soon as your stop price is

13 reach. But will not be executed until all the other orders placed before yours are completed. You will get out but it may not be at your desired price. I ALWAYS USE A STOP LOSS. When I want to get out I want to get ASAP, even if it is below my desired price. Being sold at a lower price is better than the price continuing to drop without an exit. REMEMBER: THE MARKET CONTINUES IN THE DIRECTION IT IS GOING UNTIL IT DOESN T MARKET IN DOWNTREND Every day at Investor s Business Daily has great ideas (for subscribers). Besides the IBD50 list, I always look at the: I have a new investing mantra I hope you ll use as a reminder of how to manage your portfolio: Buy the BEST Watch the NEST Visit the REST Buy the BEST self-explanatory: Do not compromise your stock picking or your signal to buy. Watch the NEST Once I own a stock, my relationship to it completely changes. It s my stock now. Take care of your chicks. Feed them as they grow (even add more).but if you discover your cute cuddly chick is weak or fighting you, it may be time to pass them on to a new caretaker. Visit the REST What about all those other stocks you identified as almost ready buy? A secret I don t talk about: I have two watch lists. One I look at daily with stocks very near buy points or waiting for EPS announcement. And a second weekly list of stocks that are getting close to a buy signal. If you take a MarketSmith trial or subscription, please mention the Dallas and Fort Worth Meetup leader (Charlotte Hudgin) as your source. This helps us get occasional guest speakers from IBD and access to MarketSmith! Thank you.

14 If this newsletter no longer suits your needs, you may unsubscribe here: Unsubscribe Change Subscriber Options Wishing you "Many Happy Returns," Charlotte Hudgin, , Editor, the Armchair Investor DISCLAIMER, Buyer Beware WARNING: This newsletter shares the ideas I use in my investing. It is not investing advice but should be taken as education only. Your investment decisions are your responsibility as are the results. If you are not comfortable with or do not understand a strategy completely, I recommend that you paper-trade until you are successful and can sleep well at night. Questions may be submitted to: Editor@ArmchairInvestor.com Some of your questions will be used in future newsletters. Additional notes follow:

15 EXPLANATION OF TERMS FOR THE MARKET ACTION OVER THE LAST 20 DAYS Four weeks of price and volume action reveal much about the direction of the market and Healthy Uptrend Price-Volume Movement Healthy Downtrend Price-Volume- Movement the strength of that movement. Price Volume Strong Action Up Up Weaker Action Down Down Strong Action Down Up Weaker Action Up Down The chart below identifies the market direction indicated by the Nasdaq s price and volume action for the last 20 days at two levels of significance. ACCUMULATION/DISTRIBUTION COLUMN - TELLS YOU WHERE THE BIG MONEY IS GOING The listing includes: the date, Nasdaq closing price and percent change of the Nasdaq price and volume. The next column identifies days that were Major Accumulation (serious UPTREND indicator) or Major Distribution (serious Downtrend indicator) using the 1% minimum rise or fall with higher volume. Minor accumulation and minor distribution days are also identified days that moved 0.2% or more but less than 1%. CONSISTENT WITH THE SUBTLE, BUT TELLING MOVES The last column is an UPTREND /Downtrend indicator. Think of a healthy Uptrend. It will have many days where the index rises with increased volume. But even in the most robust Uptrend, * not every day will be up. In any Uptrend, there will be some down days. If they have higher volume, then the day becomes a distribution day but if the volume is lighter (as frequently happens in an Uptrend), then the down day is NOT a distribution day. In fact, a drop on lighter volume says they market is NOT selling off heavily good news and consistent with the Uptrend. Using the Healthy UPTREND/Downtrend price and volume movement listed above. For example, if the Nasdaq closing price rose 0.7% and the volume rose 2% (up and up), that movement is consistent with the price-volume action of a Healthy UPTREND. If the price drops 0.5% and the volume rises 1.2% (down and up), that movement is consistent with the price-volume action of a Healthy Downtrend as indicated in the table above. Any index changes less than + or 0.2% or volume change less than + or 1% has no consistent with notation. Price and volume movements that small is not strong enough to tell us about the market movement.

16 EXAMPLE OF ACCUMULATION AND DISTRIBUTION WITH EXPANDED EXPLANATION OF TERMS: Today s Market Action with explanation 2/5/16 Index Close Index % Change Volume % Change Volume vs 50-day Avg Accumulation or Distribution Day? Current Trend: DOWNTREND Began 1/4/2015 Index % +13.8% +21.8% Major Distribution +11.3% S&P % NYSE 9, NYSE Volume Neither +6.6% -1.5% Neither +6.2% -5.3% +15.0% DJIA 16, % Neither +5.5% A Major Accumulation Day: Price RISES 1.0% or more and higher Volume than the day before A Minor accumulation Day: Price RISES 0.2% or more and Volume is strong (either higher volume or is well-above average volume) A Major Distribution Day: Price FALLS 1.0% or more and higher Volume than the day before. A Minor distribution Day: Price FALLS 0.2% or more, Volume is strong (either higher volume or is wellabove average volume) A Stalling minor distribution Day: Only in an up-trending index or stock, price is FLAT or DOWN slightly compared to the day before, closing in the bottom half of the day s range and volume is heavier or about equal to the day before or strong compared to the past market. It s the price closing low in the day s range after an uptrend that is the key for this designation. Price close to flat and higher or consistent volume indicates the big money (institutions: mutual funds, banks, etc.) are gently selling, trying to sneak out so you won t notice. ** The CURRENT TREND column calculates how far each index has moved in the current trend assuming you purchased the index (which is not buyable) at the opening price on the day after the trend change signal. When this column is GREEN, the index has moved in the direction of the market trend. HOWEVER, when this column is RED, the index change has fallen into negative territory (which could be a rise during a Downtrend) An ACCUMULATION day points at heavy buying by institutional money managers - the mutual funds, pension funds, banks, etc. A DISTRIBUTION day points at heavy selling by institutional money managers.